Predetermined Prices and the Persistent Effects of Money on Output
This note illustrates a model of predetermined pricing, where firms set a fixed schedule of nominal prices at the time of price readjustment, based on the work of Fischer (1977). This contrasts with the model of fixed pricing, the specification underlying most recent dynamic sticky-price models. It is well known that predetermined pricing cannot generate substantial persistence in the real effects of monetary shocks when prices are set via fixed duration contracts unless the contracts are of long duration. However, we show that with a probabilistic model of price adjustment, a predetermined pricing specification can produce almost as much persistence as the more conventional model of fixed prices, without the assumption of long average contract duration.
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Volume (Year): 35 (2003)
Issue (Month): 5 (October)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael T. Kiley, 1999.
"Partial adjustment and staggered price setting,"
Finance and Economics Discussion Series
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- V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
- Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
- Jeanne, Olivier, 1998.
"Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?,"
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- Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
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